Thursday, 25 October 2012

Design A Business Model That 'Works' For You

Tuesday 31 March, 2009
There are pros and cons for each type of business model. The following summarises the most common models and options for service firms.
  1. Sole trader

    You do it all. No overheads, no accountability, but no security and no life! This model creates a job, not a business.

    This is good for people who don't want to get serious about building a business, who really like working on their own - usually from home - and who want to work for themselves. Not an easy model to maintain!
  2. People intensive (for example, professional service firms)

    You add people as you grow. This is of course a proven model, whereby new consultants come on board and are responsible for covering their own costs, contributing to overheads, and to the profit pool. The typical model is that they have to bring in 3 times their own salary / package - 1/3 for them, 1/3 to overheads and 1/3 to the bottom-line. 

    In order to minimise risk, you need to employ experienced professionals who can create billings quickly and cover their costs. Less experienced people will be lower risk in terms of the initial cost to the firm, but will take much longer to contribute.

    For many professional service firms they could combine this model with model no. 4 below to generate new income streams.

    New firms in different geographic locations need an investment in infrastructure to get up and running - office, support services, IT, etc.
  3. Business within a business (for example, real estate or recruitment)

    A typical model for growth is to add more people, who cover their costs, contribute to overheads, generate billings and grow the bottom-line.  The company provides support in terms of branding, marketing and general financial / administration support. Beyond that, if the practitioners want to employ additional staff for support, for example, their ‘practice' funds it. It keeps people very accountable for profitability.

    The business within a business model has challenges though, in creating cohesion amongst many ‘practices' to create a strong company culture.
  4. Online model with IP products and/or membership

    Individuals still need the support of a virtual team. Initially slower growth is the norm from lower end fees or product prices, unless it is combined with more traditional client consulting or advisory fees as well. In order to build this type of business, the core practitioner needs to be able to develop valuable IP that can be sold online via products, memberships, programs, etc.

    The key to equity growth is systems that run the business, unique methodologies, and a valid database of clients and prospects.

    This model can also grow considerably through licensing of programs or products and/or methodologies. There need be no restrictions to global reach.
  5. Create leverage for core practitioner with virtual teams

    This model is partnered with 4 above. The core practitioner must initially generate enough revenue to build a virtual support team, whilst continuing to be the sole / primary source of income. No employee issues, but then again not necessarily the same level of commitment from a virtual team.

    You need to be highly organised to be able to run a virtual team, and have good procedures in place to make it work smoothly (as with any model). The more leverage you can add to the online model, the more equity or value you can build into this type of model.
  6. Expansion to afford new GM or CEO to 'release' the founder from day-to-day operations

    Leverage the unique skills of the founder if possible. This model takes longer, costs more, and the founder has less lifestyle until the team is built underneath. There is potential to make far more when selling a business that has grown beyond its founder, than one that still relies heavily on the core competencies of the founder to drive its growth. 

In summary

  • You can make money with any of these models
  • Some models will create more value - and be worth more to a potential purchaser
  • They all require hard work to become established and profitable
  • Whichever one you choose to design, or transition towards, needs to be a direct reflection of the lifestyle you want and how you want to spend your working time
  • People can be replaced (including founders)
  • Value creation comes from:

    • Systems and procedures
    • Continuity programs, retained clients, service and preferred supplier contracts
    • Valid and relevant databases (that have future earnings potential)
    • Products, methodologies, trademarks, domains and other IP

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